I like to tease Jo Cumbo that she can trust no-one because of her heritage! This blatantly xenophobic comment is based on a British prejudice that Australians find compulsion acceptable as compliance is in the blood. A second prejudice, that the British can trust one another – is as ridiculous as the phrase “it’s just not cricket”. Neither cricketers or Brits can be trusted not to cheat and Australians are not just a bunch of third generation criminals.

And yet…..

The Australian Superannuation system compels savings behaviours and demonstrates gross inefficiencies while the British auto-enrolment system, relies on nudge and honesty – and appears to be working very well indeed. Could we cope with a mandatory system – I suspect the answer is “no”, would the Aussies cope with auto-enrolment – I don’t know. My innate xenophobia prevents me proceeding down that track!

Auto-enrolment compliance relies on trust!

Jo Cumbo has read the Pensions Regulator’s latest data-pack on AE compliance (I have not) and she has tweeted highlights.

The Pensions Regulator has published its annual update on workplace pensions, which contains loads of new data on contributions, participation and compliance by employers.

At the end of March 2018, more than 9.5 million workers had been automatically enrolled into a #workplacepension1.1 million employers had completed their declarations of compliance.
Only a year earlier it was half a million employers.

The proportion of UK staff in a #workplacepension is 84%, up from 77% last year Total amount saved in workplace pensions in 2017 was £90.3 billion, up from £86bn last year.

In 2017, the Regulator received 90 whistleblowing reports alleging an employer was trying to induce a worker to opt out of the #workplacepension. Of those, 53 resulted in cases

The number of cases opened by the Regulator to investigate possible breaches of AE rules by employers more than doubled to 4000 in 2017. being created for further investigation.

Between April 2017 and March 2018, the Regulator used its formal powers on 102,497 occasions, a 52,429 increase in the use of our powers from 2017. The number of compliance notices issued rose from nearly 34,000 last year to nearly 61,000 this year

The number of £400 Fixed Penalty Notices issued when an employer fails to comply with a statutory notice for failing to meet its AE duties doubled to 28,864 in 2017/18 from 12,181 the year before.

The Regulator said initial data indicates that employer compliance with the first increase in contributions (2% to 5%) has been “very high”.

We are left to draw our own conclusions as to whether the Pension Regulator’s approach is fit for purpose.

Is Auto-Enrolment compliance sufficiently resourced?

Jo’s bottom tweet suggests that it mightn’t be. Recent research from PensionSync, documented on this blog, suggests that large amounts of the data recorded is recorded wrong and that some mis-collection of funds and even mis-claiming of double tax-relief is going on.

Certainly we know that there is systemic non-claiming of HMRC incentives for those on low-earnings who are auto-enrolled into net-pay schemes and get no incentive (despite it being part of the deal).

I would divide non-compliance into the categories of the confessions

Ignorance

Some employers and payroll officers aren’t very good and many providers assume they are.

Weakness

It is easy to allow bad practice to persist , for fear that exposing it – will lead to trouble, both to the whistle blower and the employer

Own deliberate fault

There is a steady stream of employers who deliberately lie about auto-enrolment and set out to keep money in the company, rather than in their employee’s pension pots.

TPR’s regulation is – to me – proportionate to my perception of the problem. Most non-compliance is through ignorance and incompetence, some is through weakness and should be whistle-blown and a small part is deliberate.

Any sensible strategy from the AE enforcement team ought to aim at educating the ignorant, empowering the whistle-blowers and coming down with an iron fist on employers who steal from staff.

In my opinion, this is what TPR are trying to do. The numbers of people they are finding in these categories is small, the issue is not in their method, but as to whether sufficient resource is being allocated to dealing with these three issues.

How much is enough?

We yearn for perfection. Actuaries, pension administrators and regulators have yearned for GMPs to be reconciled and equalised for decades. We know that had everyone levelled up initially, the cost of putting things to a median state today, would never have been incurred. It is cheaper to do things right first time, and in the case of GMPs – it would have been cheaper to have produced a simple system that gave everyone full shares.

No doubt we will look back at the initial stage of auto-enrolment with its various contribution basis’, phasing and self-certification of compliance as equally over-complex. And yet, most payrolls see AE as BAU and most employers now count pension costs as part of their financial model.

Were we to seek perfection, we would look at all the consultants we have employed and agonise over whether we should have included them. We could look again at our pro-rata allocations against AE periods and we could try to unravel the complex contribution histories to ensure that there were no winners or losers – but absolute compliance.

TPR could audit on this basis. The cost of regulation could outweigh the benefit of increased compliance and the cost of increased compliance could prevent employers ever contributing beyond the AE minima to staff.

Regulator’s talk of proportionate regulation; they know that resources are finite. There is an efficient frontier out there between enforcement and engagement. The more that TPR can encourage engagement, the more efficient that frontier becomes.

The philosophy of compliance

We have in auto-enrolment, something of a success story, even with the employers for whom pensions has become a compulsory part of business life for the first time.

There is a natural link between work and pensions, it’s in the title of the department and it’s in one of my favourite synergies “work is boring, pensions are boring”.

But boring is good, just like exercise and not smoking weed or tobacco. Boring is good because it leads to exciting later. Deferred gratification is something we all think is good, especially when we know that getting old is tough!

I will continue to applaud the Pensions Regulator, as I think Jo Cumbo is doing. We could treble the compliance teams in Brighton, but would we cut breaches by 2/3 – or make auto-enrolment more of a success – I doubt it.

The Pensions Regulator is in a good place on auto-enrolment; it’s good – not perfect. Philosophically – I think it’s good enough for now! Practically, I think it’s good enough for now.

We are learning to trust auto-enrolment and that is the first step for 10m of us – for whom pensions have been – till now – a rich person’s play thing. To fulfil on auto-enrolment stick, the workplace pensions have to deliver; that will require a new level of compliance and a new order of trust.

2 Responses to Auto-enrolment; a national exercise in trust.

Henry, I don’t always agree with everything you say, but I think you hit the nail – several nails – right on the head here. Jo Cumbo’s modulated degree of scepticism is an important safeguard, though, too.

It was always going to be tricky making very small employers comply. I argued back in the Pensions Commission days (I was on the TPR board then) that they should have followed the stakeholder rule and made compliance mandatory for employers with 5 people or above. Given that people have N jobs during their lifetime, the proportion of the working population who would not start a pot, at some time would be tiny, and – if a different piece of the Australian experience is right, once people have a pot of a reasonable size, the miracle of actually having people looking to maintain their pot might actually happen (eventually).

It bothered me (coming from a family that lived in and ran a corner shop, with one shop assistant to bolster the family’s time availability – think ‘Open all Hours’ but selling second hand goods) that (a) such businesses are often pretty hand to mouth; (b) there is a danger of reducing jobs in them as in France where the social security taxes, and the bureaucracy which goes with them, see small businesses do all they can to avoid employing people (cash in hand, poorly paid gang labour, simply not having anyone do the job, etc, result) and (c) criminalising thousands of one man band businesses otherwise totally law abiding doesn’t seem like a bright thing to do.

It seemed to me that this was a set of risks more worth running than the obvious ones which go with a cliff edge limit – people structuring a 20 employee business into five units of 4 employers etc. The incredibly steep curve of employers with low single figures means that there would be far fewer to police for such behaviour, making TPR’s job much more manageable. its much easier for people to feel unsympathetic to an employer with 5 people, who claims that that it can’t cope with the bureaucratic tasks than it is for a shopkeeper with one assistant.

Argument lost – as many others – but I think it does call for an understanding approach to the application of the law – achieving ‘compliance by coaching’ which is how I sort of read your views.

Australia is different, of course, because over there, compulsory super was negotiated – in an employment market with a much more unionised workplace – by the unions as a swap for pay rises. They have certainly had their problems – although even from the outset, the terms of their plans had charging levels which look extreme now in the light of the scale of pots which have built up but which at the time were order of magnitude lower than the UK market’s pre- stakeholder charges (which, yes, we are still struggling to sort out).

I well remember, during a visit there in 1999 asking a superfund provider how on earth they could operate profitably at the charging levels they were applying. His answer was, ‘look at the long run, we’ve realised that, over time, it’s better to give a customer a haircut every year, than scalp him once’.

And the Aussies are getting their house in order, I reckon – many fewer super funds, lower charges, and – post the Hooper review – transfers between funds (crucial to deal with the mulitipicity of small pots problem – see reference above to people changing jobs, by the way) having, by law, to be completed in 3 days – yes, that’s 3 days – are big steps forward. And one heard that as the pots are growing, engagement levels and comprehension are actually rising.

Anyway, good topic to be airing! Very pleased to see it out for discussion, Henry – and Jo!

We’re working with 32000 employers on AE, many of them very small like Laurie’s corner shop. What I can say about them is that , extremely rare exceptions apart, they want to get it right, to enrol the right staff and to pay the right contributions for them. And when they get it wrong they are also prepared to put in the effort to go back and correct. I know that as we’ve been doing a lot of corrections recently and employers are engaging with us to get data right.

But pensions are complicated and so people will make mistakes. Ros Altmann has now started a campaign to improve data quality which is an excellent idea